A "Shot in the Arm" for the Housing Market

By Lawrence Yun, NAR Chief Economist

Home sales continue to edge up and down. Overly stringent lending criteria imposed by Fannie Mae and Freddie Mac in the past month no doubt held back contract signings. Pending home sales (see page 3) declined in July, after rising in June. But the recent action by the federal government in "taking over" the two GSEs could be the shot in the arm that the housing market needs.

Even with the latest pullback in contract signings, pending home sales have been fairly stable on a national basis for nearly a year, with dramatic local market differences continuing. Contract signings have been steaming ahead, nearly doubling in activity from a year before in several California and Florida markets. The outer Washington, D.C., exurbs also are coming around very strongly. That bodes well for future home sales nationally.

Another factor is the attractiveness of FHA-mortgages. FHA is taking a more active role in serving a broad cross-section of home buyers, but it will take some time to fully get up to speed. There's been a surge in FHA mortgage applications. Interestingly, many people in high-cost areas aren't familiar with FHA programs. REALTORS® should be aware that they are one of the major sources of information about mortgage programs for their clients. They should familiarize themselves with this increasingly valuable program.

Still, there are many ambiguities in the marketplace. The economy is producing more, yet job cuts continue. GDP growth in the second quarter of this year was 3.3 percent. In fact, the last time GDP growth was negative was in the fourth quarter of last year - and that was before the unprecedented surge in oil prices. In spite of relatively healthy GDP growth, 84,000 non-farm payroll jobs were shed in August - more than most analysts (including me) expected. And those most recent job cuts have been across the board in all sectors.

Those job cuts help explain anemic consumer confidence. While consumer confidence rose in August, the Conference Board reports that its consumer confidence index stood at 56.9 for that month.. The reading suggests that for most Americans, the economy is basically in "neutral." A first-time home buyer tax credit - one of the provisions of the economic stimulus legislation passed and signed into law earlier in the summer - and lower interest rates on newly conforming jumbo loans favors consumers. But buyer confidence remains low. Even with the Treasury Department's direct intervention in the secondary mortgage market, it is unclear if we will go back to sound normal underwriting criteria, or if it will remain overly stringent. The housing market outlook is very cloudy.

We often cite the real estate professional's mantra: all real estate is local. But economic conditions are also local. The speed and timing of a housing and economic recovery depends on local market conditions. Based on local market fundamentals, I expect robust home price growth in places like Denver over the next two years. Up until the weekend of September 12, I would have included Houston in that list as well, but given the recent damage wrought by Hurricane Ike we'll have to watch the Houston market closely to see how fast its economy recovers from the storm. In addition, the frequent reporting of multiple bids in California and Florida may be signaling a bottom in home prices in those areas. Nationally, home sales are stable now but are expected to increase in coming quarters.

A Look Down the Road

Looking at middle-ground assumptions, existing-home sales are projected to total 5.01 million this year before rising 6.9 percent in 2009 to 5.35 million. After declining an average of 4 to 7 percent
this year, home prices are forecast to rise by 2 to 4 percent next year. New-home sales will total about 508,000 in 2008 and 463,000 next year, down significantly from 775,000 in 2007. With builders motivated to clear inventory, housing starts, including multifamily units, will probably fall 17.1 percent in 2009 to 801,000 units from 966,000 this year. NAR's housing affordability index is likely to remain favorable throughout 2008, averaging 13 percentage points higher than last year.

Growth in the U.S. gross domestic product (GDP) is forecast to remain positive with a growth rate of 2.0 percent for all of 2008, and 2.0 percent also next year. The unemployment rate is estimated to average 5.8 percent over the coming year. Inflation, as measured by the Consumer Price Index, is anticipated at 3.8 percent this year and 1.6 percent in 2009. Inflation-adjusted disposable personal income is projected to grow 1.8 percent in 2008 and 2.1 percent next year.

Other Factors and Conclusions

The recent takeover by the federal government of Fannie Mae and Freddie Mac could significantly affect many of the components of housing activity. For one, interest rates are likely to dip initially. That is good news for homebuyers who have been waiting for rates to decline. In addition, the recently enacted economic stimulus package that provides for a first-time homebuyer tax credit could spur those consumers currently waiting for that one piece of encouragement to become homeowners. Recent drops in the price of a barrel of oil could also impact consumer confidence - but a lot depends on the supply of oil (OPEC was meeting this month to decide whether or not to curtail production), the strength of the U.S. dollar, and if any of that translates into major declines in the price of a gallon of gasoline at the pump for American consumers. The impact on fuel prices post-Hurricane Ike is also wildcard.

And there's always politics. At the time of this writing, the national election is less than two months away. Housing will be major issue in the campaign - and for the next administration.